Component Plan Testing

[PensionPro]

Cross-tested PS only plan fails a4 testing. Owner 50. Three employees ages 55, 63, 23. Need 2 ees with higher EBARs than the owner if all employees tested together.

Can I restructure into component plans:

A) owner, two employees ages 55 and 23 on benefits basis

B) 63 year old employee on a contribution basis

Thanks for any input!

[ETA Consulting LLC]

No. When you restructure, you'd need a 70% coverage ratio for each component in order for it to work. You're only at 66.67% under your analysis.

Good Luck!

[chc93]

I got this from Jane Osa's session at the ASPPA 2006 annual conference (she provided the same at the ASPPA 2005 summer conference)...

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Restructuring a plan for Component Plan testing

The concept of restructuring a plan into component plans (1.401(a)(4)-9©) for testing is that since

benefits could have been provided in two separate plans anyway, each of which would separately satisfy

401(a)(4), you should be able to do the same thing within one plan. No special plan language is required

to do this. You cannot use component plan testing for 410(b) – it must be satisfied on a total plan basis

before restructuring. You would need to satisfy the ABPT on the plan as a whole in order to use the

mid-point percent to pass the rate group testing in a component plan. The total plan must also satisfy the

Gateway before restructuring.

After satisfying 410(b) and the Gateway on the plan level, you can restructure the plan. Each employee

can only benefit under one plan (1.401(a)(4)-9©(2)), and each of the component plans must separately

satisfy 410(b) in whatever way it works – be it by satisfying the 70% test or by the ratio percent exceeding

the NDCT safe harbor percent! There is no need to satisfy a reasonable classification test at this point.

Any criteria may be used to assign an employee to one or the other component plan. Once each

component plan separately satisfies 410(b), the component plan separately satisfies 401(a)(4) in any way

you want to pass the test – including utilizing a safe harbor!

Jane L. Osa & Associates, Inc.___________________________________________ 18

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[bolded emphasis is mine]

My thoughts after reading this:

1. plan as a whole pass 410(b) by 70% ratio test, then no concerns for reasonable classification

2. plan as a whole pass ABPT so can use mid-point for rate group testing

3. set up component plans in any way desired, as long as each component plan passes 410(b) by 70% ratio OR ratio percent exceeding NDCT safe harbor percent (no reasonable classification required for component)

4. do rate group testing in each component plan

So, if #1 passes, each component plan does not have to pass 410(b) by 70%. Am I not reading this correctly?

[pmacduff]

Don't you also need at least one HCE in each group?

[PensionPro]

Thanks for the responses. Just wanted to make sure I could use the ABT to pass coverage in the component plans. Don't think I need an HCE in each of the components.

Thanks, chc. I agree that if you are using ABT to pass 410(b) for the whole plan, the reasonable classification applies.

[Tom Poje]

you have me curious as to why you would component a NHCE by himself. it would serve no purpose. you end up treating him as a 0 when looking at the accrual portion, so why not just include him in the accrual test with a small e-bar?

[PensionPro]

Tom, after going through the math I came to the conclusion that while permissible component testing is not helpful in this case as you point out.

[chc93]

So... do we agree that if the plan as a whole passes 410(b) by the 70% coverage ratio, then reasonable classification is not an issue. And therefore, each component plan coverage ratio only has to pass the 70% ratio OR the NDCT safe harbor percentage (which is 50% max). In which case, the original OP example of 66.67% coverage ratio for Component Plan A "passes 410(b)".

However, I do understand that component plans are not useful in that particular situation. I only want to confirm the "passes 410(b)" requirement for each of the component plans.

[Tom Poje]

as a general rule:

each person is in only one component plan (the regs actually imply you could have more than 2 but I'm not sure if that would help)

Each component plan satisfies 410(b)

Each component plan satisfies a(4)

a coponent plan satisfies Avg ben Pct test if the plan of which it is part satisfies avg ben pct test.

you can't use to satisfy the gateway

the plan as a whole still must satisfy 410(b) as well

[Mike Preston]

This thread was brought to my attention that the conclusion reached herein which deals with whether a component plan must, on its own, satisfy the reasonable classification test is different from the conclusion reached about 10 years earlier in this thread:

http://benefitslink.com/boards/lofiversion...php/t13181.html

I still hold to the position taken in the earlier thread and believe that the IRS does, too.